What is modified adjusted gross income (MAGI)? Definition
Modified adjusted gross income (MAGI) is your adjusted gross income (AGI) with certain adjustments (modifications) added back in. If you want to know whether you qualify for certain tax benefits, you’ll need to know your modified adjusted gross income.
To determine your MAGI, you need to understand a few terms:
- Gross income: All the money you earn, whether it’s from a 9-to-5 job, tips, rental income, retirement distributions, taxable interest or dividends.
- Adjusted gross income: Your gross income after subtracting allowable tax-deductible expenses, such as IRA deductions and health insurance if you’re self-employed.
How to calculate modified adjusted gross income
After determining your gross income and adjusted gross income, you can easily calculate your modified adjusted gross income.
Take your adjusted gross income from your Form 1040. Now, add back some of the deductions that were made, such as:
- Deductions you took for student loan interest and tuition.
- Half of self-employment tax.
- Foreign income that’s been excluded.
- Losses from a publicly traded partnership.
- Deductions you took for your IRA contributions.
How your modified adjusted gross income affects you
Once you know your MAGI, you will know if you’re eligible for certain tax benefits and/or whether you will be able to take a tax deduction for things such as tuition. Your MAGI will also determine if you can make tax-deductible contributions to your individual retirement account. These options — and knowing your MAGI — are important because it could help you financially.
For instance, your MAGI can help you determine:
- Whether you can contribute to a Roth IRA.
- If you’re able to deduct traditional IRA contributions, depending on whether you or your spouse have a retirement plan from their employer.
- If you’re eligible for a premium tax credit that you can use toward health insurance plans.
The MAGI cap for certain allowable tax deductions, such as for contributions to traditional IRAs and Roth IRAs, may change annually. For example, from tax year 2020 to tax year 2021, the MAGI limit governing when deductions for traditional IRA contributions begin to phase out rose by $1,000. The MAGI limit for Roth IRA contributions rose by $2,000 for a married couple filing jointly. The 2021 limits were included in instructions for 2020 tax returns, giving taxpayers advance notice of the changes.
Modified adjusted gross income (MAGI) vs. adjusted gross income (AGI)
The numbers are similar, but they will be slightly different and will have a different impact on your taxes. While AGI is used to determine your eligibility to claim deductions and credits available to you via your tax return, MAGI is used to determine how much of your IRA contribution is tax-deductible and whether a taxpayer can be eligible for premium tax credits.